I am increasingly convinced that professional economists need to go back to Econ 101 to refresh their memories about the basics of their trade. In the Wall Street Journal Edward Lazear writes about his concern about U. S. labor productivity:
How are American workers doing? Neither the middle class nor the poor have fared well in recent decades—but don’t blame tax cuts, a too-low minimum wage or the greed of the 1%. In rich countries around the world, the top half of the income distribution has been pulling away from the bottom half. Productivity growth among high-wage workers, driven by technological change, is the reason.
When measuring wage dispersion, economists frequently look at the 90/50 ratio—the wage of the worker at the 90th percentile divided by the wage of the worker at the median. In 2017 the 90th-percentile worker earned around $108,000, while the median worker earned around $45,000 a year—a ratio of 2.4. That’s an increase from 2.2 since 1997. Over the same period, the 50/10 ratio—the median wage divided by the wage at the 10th percentile—stayed flat, at 2.1.
[…]
The likely explanation is that changes in trade and technology have raised the productivity of highly trained, highly educated workers relative to the less skilled. Wages tend to move with productivity, so that if differences in worker productivity grow, wage differences will also grow.
The data provide some clues on how to remedy this situation. Here’s where wage ratios become informative. Germany is a wealthy country, second only to the U.S. among Group of Seven nations in gross domestic product per capita. The median German earns 55% of what the 90th-percentile German worker earns, while the median American worker earns only 41% of what the 90th-percentile American worker earns. The German middle class does better compared with top-earning Germans than the American middle class does relative to top-earning Americans.
Here’s his prescription:
The goal of policy makers, in education and the labor market, should be to bring up the skills of the lower half of wage earners so that they compete more effectively with the top. Only narrowing the skills gap can address the problems of the working and middle classes.
Ahem. The U. S. spending on education is significantly higher than that of other OECD countries, whether tallied in absolute dollars, dollars per student, or percentage of GDP. That’s true both for K-12 and higher education. If the “productivity gap” could be remediated through education, it would already have happened. Occam’s Razor drives one to the conclusion that something else is at work.
Back to basics. Substitution. One good may be substituted for another. In the U. S.’s case we are substituting lower-skilled labor for higher-skilled labor, both by using manual labor in preference to automation, by using foreign workers and by offshoring. We don’t do it for the workers with the highest skills because it’s prohibited by law.
Business investment. Productivity is the ratio of inputs to outputs and one of the factors in increasing productivity is business investment. That’s where we’re falling short.
Back to school, Prof. Lazear!
Spending on education is not education. Todays community colleges are in many cases just remedial high schools. And spending inflation gives a false picture, as we really are spending for administrators.
Further, Germany separates the wheat from the chaff early on, imparting the best skills training available to those not destined for university. Spending is more directed and efficient.
I would also note that manufacturing and services have different inherent capital spending needs and expected results. I wonder if Germany has avoided the boneheaded trade policy of eviscerating its manufacturing base. Without even investigating, I suspect so.
That highlights a pet peeve of mine. Too many people, including people who should know better, do not understand the use of the word “system” in “educational system” or “health care system”. Other countries’ systems are not buffets from which the best features may be selected and recombined in isolation from the balance of the system. I would love to have a debate on the benefits of the German health care system with an American willing to accept the entirety of the system. The highest-paid German physicians, for example, earn about $400,000 per year while the typical physician earns about $100,000 per year. Other workers in the health care sector earn less.
In a financialized economy, productivity is valued in financial terms.
Increased productivity should be about producing more goods or services by an entity (human or mechanical), and cost-savings are achieved by selling more at the same cost. In a financialized economy, increased productivity is about lowering cost, and producing more goods or services is not required.
In a financialized economy, the financial industry is most productive.
The problem is not the financial industry. The problem is the financialized economy, and I think we all know where I am going next …
Blah, blah, blah … broken record … blah, blah, blah.
“Further, Germany separates the wheat from the chaff early on, imparting the best skills training available to those not destined for university. Spending is more directed and efficient.”
And controlled by the government. I am honestly surprised you advocate for, or at least defend this. I think this could be an interesting research topic. Are we better off letting people choose, or should the government separate people out and put them on the path to college or trades based upon some scoring system?
Steve
A full 20 percentage points separates the proportion of the German population with college degrees from the number of Americans with college degrees and the gap between the earnings of those with or without college degrees is a lot lower.
Our system is one in which the only way you can compete for a job with someone who hasn’t completed high school, doesn’t speak English, and is willing to live with five other guys in an efficiency apartment is to get a college degree while accumulating tens or even hundreds of thousands of dollars in debt. The Germans call that “the American system”.
Is that true for mechanics, electricians, plumbers or tradespeople in general? I dont think so. Probably true for meat packers, many agriculture jobs and pure manual labor. Where I think it really come into play is in the service industry. Those have never paid that well, but that is where we have had our growth.
Steve
It varies by state but in most states electricians and plumbers require licenses which are an impediment to their being replaced entirely by immigrant labor. However, it does seem that the use of unlicensed work has increased substantially.
Dave and Steve-
“Other countries’ systems are not buffets from which the best features may be selected and recombined in isolation from the balance of the system. “
Oh I hear you Dave. This a well worn subject here. I happen to believe that this aspect of their system that is better at directing students. It does come at a cost to liberty, and that is antithetical to most Americans values. Hence, I don’t know if it would work here.
Steve – who says it has to be government, and mandated? Get control of yourself. Here in the US it’s a failure of honest, sober communication of reality. And look what we have, a guy who should have become a plumber with four years of accrued debt and a degree in humanities. He’s screwed. Then we get the current crop of moronic, pandering Dem presidential candidates advocating that the general society should extinguish the debt of these peoples bad decisions. This is no different than than the inner city kid whose parents are convinced their son is going to the NBA. One in a million. Then the schools shower them with money…………and perhaps get them a job cooking chicken fried steaks after they go undrafted. Our universities are cruel and users of people.
“It varies by state but in most states electricians and plumbers require licenses which are an impediment to their being replaced entirely by immigrant labor. However, it does seem that the use of unlicensed work has increased substantially.”
And that isn’t enforced at the jobsite. You could have unlicensed people do the actual work, and then have the licensed foreman/supervisor check and sign off on everything. My understanding is this is pretty common for new construction and major renovations where more than one tradesperson is needed.
A good deal of the low productivity, perhaps all of it, is due to genetics. This cannot be remedied by education. That is the blank slate delusion that all humans are identical.
What we need are economic and trade policies that take into consideration the abilities and needs of all our citizens, not just the upper and middle classes. The opioid epidemic is just one symptom of how badly we have failed the lower class. The Democrats used to promote policies like Social Security and the National Labor Relations Act, but now they don’t.